Two of the UK’s biggest infrastructure clients have said the low margins suffered by the country’s biggest contractors in this year’s CN100 are reflective of the issues currently being faced by suppliers.
The CN100 today revealed that the margins for the UK’s top 10 contractors had dropped for the fifth year in a row, down from -0.5 per cent in the previous CN100 to -0.9 per cent in this year’s analysis.
HS2 procurement and supply chain director David Poole (pictured, right) said: “This analysis of supplier margins reflects the impact of a number of specific supplier issues as well as a failure for suppliers to improve margins more generally.”
He added that the CN100 data highlighted the importance for the industry to focus on “innovation, efficiency and bottom line”.
HS2 awarded its seven civils contracts worth a total of £6.6bn last summer. It is set to award the deals for its two London stations contracts worth £3bn this autumn.
Mr Poole, who was previously director of commercial and procurement at Highways England, vowed to ensure HS2 offered long-term opportunities for contractors to invest, build skills across the UK.
Commenting on the CN100, National Infrastructure Commission chairman Sir John Armitt said that in more than two decades very little had changed on margins.
Sir John told Construction News: “I remember Neville Sims the former Tarmac CEO was quoted as saying the holy grail in contracting was getting just 2 per cent margins; that was 25 years ago and nothing has changed – contractors still end up with jobs they wish they hadn’t got involved in and it drags on.”
He said that clients were key to ensuring contractor margins grew and that they needed to embrace more innovative ways of procuring and delivering projects to achieve this.
Sir John said: “Fundamentally it is in the hands of clients, and there needs to be a significant number of clients who are willing to take a more collaborative and different style to the work than simply lowest bid and fixed priced lump sum and all the rest of it.”
He added: “There is a wind of change by the mere fact you have project 13, that is really encouraging.
“If over the next five years one can see that sort of thinking and attitude from major clients starting to pull through, then that would be good and we might see margins come up a bit.”
CN100 coverage: In-depth analysis and reaction
Network Rail, the UK’s biggest builder, said it had now begun to bring in changes to address some of the issues currently facing contractors, including rewarding firms for taking on contracts with greater risk.
Network Rail commercial projects director Stephen Blakey (pictured, left) said: “Understanding the relationship between cost, value and associated risk has informed Network Rail’s procurement strategies and the use of various delivery models.”
Mr Blakey added that the rail client was also trying to tackle poor payment practices driven by contractors’ desire to hold onto cash.
“The industry has a record of poor payment practices driven by a natural temptation to hold onto cash. This is why Network Rail has formalised key elements of the Rail Fair Payment Charter within its new suite of contracts, fixing payment terms to tier two suppliers at 28 days and abolishing retentions,” he said.
Today’s CN100 is the first to be published since the collapse of the UK’s second-biggest contractor Carillion.
When asked whether he thought Carillion had had any impact on the way clients acted going forward, Sir John said: “I don’t think Carillion has had any impact on the way clients act, why would it?
“I think most people would say the Carillion dilemma or issue was not that different to the Balfour Beatty issue a few years earlier; a big contractors with a series of contracts that they probably bid low on that have go pear shaped for them.
“Balfour managed to turn it around, and Carillion didn’t.”
Carillion was Network Rail’s second-biggest contractor when it collapsed in January and the client has had to act swiftly to protect companies in Carillion’s supply chain.
The Carillion collapse has also led to Network Rail carrying out more stringent checks on its suppliers at more regular intervals, Mr Blakey said.
He said: “Network Rail is strengthening its annual financial review of framework suppliers, applying similar rigour to annual financial reviews as those that take place at contract award.”